10 June 2010 External T.I. 2009-0328661E5 - Employees Profit Sharing Plan

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Does a valid EPSP exist in a hypothetical situation? Does an error result in all employees becoming members of the EPSP

Position: General comments.

Reasons: Question of fact.

XXXXXXXXXX
									2009-032866
									Ann Townsend

June 10, 2010

Dear XXXXXXXXXX ,

Re: Employees Profit Sharing Plan ("EPSP")

This is in response to your electronic correspondence of June 22, 2009 wherein you requested a ruling concerning the application of section 144 of the Income Tax Act ("Act") in the following situation.

You described an arrangement (the "Plan") under which payments are required to be made by an employer to a trustee for the benefit of employees ("Members") who have made a contribution to the Plan or to the employer's registered pension plan. The employer's payments for a particular Member are, subject to the employer's "net operating income" meeting a certain threshold, based on a percentage of the Member's contributions made in the calendar year preceding the Plan year. The employer's contributions cannot exceed 6 % of the particular Member's salary for that calendar year, but have to be at least $100.

You indicated that in a particular year, an error occurred in the administration of the Plan such that all employees, including those who were not Members, received the minimum $100 contribution into their individual accounts thereby making them Members of the Plan.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. The particular transactions outlined in your correspondence appear to be completed transactions involving specific taxpayers. This Directorate does not provide written interpretations involving completed transactions since, as mentioned in paragraph 22 of IC 70-6R5, such requests should be made in writing to the appropriate tax services office. Furthermore, all the detailed facts and documents of the situation including the terms of the trust indenture and the terms of the Plan would be necessary to provide such an interpretation.

We are, however, prepared to offer the following general comments, which may be of assistance.

All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended ("Act").

According to the definition of an EPSP in subsection 144(1), one of the essential requirements for an arrangement to qualify as an EPSP is that payments to be made by an employer to a trustee under the arrangement must be computed by reference to profits. This means that there has to be a binding obligation by the employer to make payments in accordance with a realistic formula in which profits are the principal variable and the employer has to make these payments in the event of profits. It is not enough that profits are used only as a means of calculating the employer's contribution.

In the situation you have described, we are of the view that this requirement would not be met since the payments to be made by the employer are dependent upon factors or conditions other than profits, such as the contribution made by the Members and a percentage of Members' salaries.

Subsection 144(10) provides that where the terms of an arrangement under which an employer makes payments to a trustee specifically provide that the payments shall be made "out of profit', the arrangement would be deemed for the purpose of subsection 144(1) to be an arrangement under which payments are "computed by reference to the employer's profits" if the employer so elects. Consequently, if the employer makes the election under subsection 144(10) and meets all the other conditions under the definition of EPSP in subsection 144(1), the Plan would qualify as an EPSP.

It is our view that an "out of profit" formula must provide for an acceptable yearly minimum contribution per employee member. Any provision in the arrangement that suspend employer's contributions or reduce them below an acceptable minimum would not be permitted. In the situation described, we are not able to comment on whether the Plan provides for an acceptable minimum yearly employer's contribution for Members.

Whether a particular employee is a valid Member of the Plan is a question that can only be resolved after a complete review of the facts, circumstances and relevant document of the situation.

We trust these comments are helpful.

Louise J. Roy, CGA
Manager
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch